Ireland: Under The Spotlight Of The Central Bank

Muireann Reedy examines the potential implications of the
Central Bank's powers for those involved in the management of
regulated entities.

Regulated entities and those involved in their management need
to be aware of the potential consequences of not running a tight
ship. Professional advisors to regulated firms, or even to entities
related to such undertakings, should also be aware that the Central
Bank can also come knocking at their door, using its compulsory
information-gathering powers.

The Administrative Sanctions Procedure

The Central Bank's enforcement regime, the Administrative
Sanctions Procedure (ASP), was introduced in 2004 by amendment to
the Central Bank Act 1942. It has evolved since then, most
significantly since the introduction of the Central Bank
(Supervision and Enforcement) Act 2013, which gave the Central Bank
wide-ranging compulsory powers. These powers are frequently used in
ASP investigations.

Under the ASP, the Central Bank can sanction regulated entities
and individuals who are or were involved in the management of these
entities where a regulatory breach, described as a "prescribed
contravention", has been or is being committed. The definition
of a "prescribed contravention" includes contraventions
of over 100 pieces of legislation and any code or direction or
condition imposed under them. A person who is or was involved in
the management of the regulated firm can only be sanctioned where
it is shown that they are "participating" or have
"participated" in the breach.

The Central Bank can impose sanctions either following a
settlement agreement with the relevant entity or individual or at
the conclusion of an investigation under the ASP, or after a
negative finding is made at inquiry (a formal mechanism used where
an inquiry member or members decide if a "prescribed
contravention" has occurred). While a settlement can be agreed
on any terms, the Central Bank tends to use the sanctions available
at inquiry as a benchmark. These include fines of up to €10
million or 10% of turnover (whichever is greater) on a regulated
entity and fines of up to €1 million on an individual. An
individual can also be disqualified from being involved in the
management of a regulated entity for a certain period. Firms need
to understand that to date, apart from any financial penalty or
fine, the Central Bank has only been willing to conclude a
settlement agreement where the firm admits the contravention and
agrees to the content of the Central Bank's publicity statement
on the case. Both admission and publicity can have far-reaching
implications for a firm, both domestically and further afield.

Since 2006, the Central Bank has entered into over 100
settlements with firms and individuals, and imposed fines of over
€56.5 million. Fines have generally been increasing –
2016 saw the biggest annual figure to date of €12.05 million.
The largest fine on an individual to date is the €200,000 fine
imposed on Seán Quinn Senior in 2008 in relation to an ASP
concerning Quinn Insurance Limited (now under administration). A
total of 11 individuals have also been disqualified from being
involved in the management of regulated entities for periods of
between one and 10 years. Dealing with the enforcement process can
be a significant emotional and financial burden for executives. In
terms of the financial burden, checks should be made of
directors' and officers' insurance cover to see what it
provides for in terms of defence costs and fines under a regulatory
enforcement regime. Executives also face other knock-on effects,
particularly if they are seeking a position in another regulated
firm in the future given disclosure obligations in the individual
questionnaire.

Fitness and Probity Regime

The Central Bank Reform Act 2010 introduced the Fitness and
Probity Regime. It is applicable to those performing certain senior
roles in regulated entities described as controlled functions (CFs)
and pre-approval controlled functions (PCFs). Under this regime,
regulated entities must seek the prior written approval of the
Central Bank before appointing individuals to perform a PCF (these
are a subset of the individuals who perform CFs) and in all cases,
must carry out their own due diligence.

The Central Bank has prescribed 11 functions as CFs and 46
functions as PCFs. Some of the listed PCFs include head of finance,
head of internal audit, head of treasury and head of accounting
valuations.

As part of its gatekeeper role in approving the appointment of
individuals to perform PCFs, executives should be aware that the
Central Bank may decide to call them in for interview to assist in
its decision as to whether they have the requisite fitness and
probity. The Central Bank has stated that it will routinely
interview applicants for the roles of chairman, CEO, finance
director or chief risk officer at any high impact firm as well as
applicants for the role of chairman and CEO at any medium-high
impact firm. The Central Bank can decide to interview any
individual for a PCF role at its discretion, however.

Where the Central Bank is minded to refuse the appointment of an
individual to perform a PCF, it will usually conduct a
"specific interview" with the person. According to the
Central Bank, these are very detailed and enforcementled
interviews. In November 2016, the Director of Enforcement at the
Central Bank advised that approximately 31 specific interviews to
challenge candidates had been conducted with 18 candidates
withdrawing before the fitness and probity process reached
conclusion. This likely reflects the reluctance of individuals to
have a formal negative decision recorded against their name by a
national regulator.

The Central Bank may also – at any time –
investigate the fitness and probity of individuals who are
performing CFs, or who it believes are about to be appointed to
perform a CF, to determine if they are of appropriate fitness and
probity. This can, in a worst case scenario, end with the Central
Bank deciding that the individual is not of appropriate fitness and
probity, in which case it may issue a prohibition notice
prohibiting the individual from performing the relevant CF, part of
a CF or any CF for either a defined period or indefinitely, or
alternatively from carrying out all or part of the CF without
adhering to certain conditions.

To date the Central Bank has published details of two
prohibition notices, one concerning an individual who was
prohibited from performing certain PCFs for a two-year period and
another where an individual was prohibited from performing any CF
indefinitely. The Central Bank has also advised that a suspension
notice has been issued, which prohibits an individual from
performing a CF pending the outcome of an investigation, in respect
of a former manager at a credit union concerning the alleged
misappropriation of funds. This investigation is ongoing.

Compulsory information gathering Powers

Part 3 of the Central Bank (Supervision and Enforcement) Act
2013 (the 2013 Act) gives the Central Bank extensive
information-gathering powers, which can be used on an extremely
broad range of entities and individuals including regulated
entities, related undertakings of regulated entities and a person
who is or was an officer, employee or agent of such entities.

Accountants, auditors and financial or other advisors to
regulated firms or related undertakings of regulated firms (whether
they are presently in that position or whether they previously
advised them) are explicitly brought into the net of individuals in
respect of whom the Central Bank can use its compulsory powers. The
only pre-requisite for the use of these powers by the Central Bank
is that it is "necessary to do so for the purpose of the
performance of the Bank's functions under financial services
legislation relating to the proper and effective regulation of
financial service providers".

Although the Central Bank's compulsory information-gathering
powers can be used in a variety of circumstances, they are
frequently exercised in the conduct of investigations under the
ASP. Individuals may be surprised to receive a notice from the
Central Bank requiring them to provide it with certain information
or to attend the Central Bank for interview in their position as a
former advisor to a regulated undertaking, or indeed where they are
asked in their position as an employee of a regulated entity or a
related undertaking of a regulated entity to provide information to
the Central Bank. The Central Bank can use its compulsory powers
to:

Inspect premises and take copies of records found at the
premises;

Require individuals to answer questions and provide a
declaration of truth in relation to the answers to those
questions;

Compel individuals/entities to provide it with certain
information; and

Operate computers found at a premises, among other
matters.

It is a criminal offence not to comply with a requirement
imposed under Part 3 "without reasonable excuse". The
2013 Act does not specify what might constitute a "reasonable
excuse" for non-compliance with Part 3 but – given that
the 2013 Act makes provision for the Central Bank to apply to the
High Court for a determination as to whether documents contain
privileged legal material – where access to information is
refused, it would appear that non-disclosure on those grounds would
amount to a reasonable excuse for non-compliance.

What to do?

Individuals should ensure that they are aware of the scope of
the Central Bank's powers, and any limitations to them, when
providing information or evidence to the Central Bank. For example,
can they refuse to give access to particular documents on the basis
that they contain privileged legal material? Or can they refuse to
answer a question on the basis that it might incriminate them?
There are nuances in the breadth of these powers, depending on the
legislation in question. Given the implications, legal advice
should really be considered.

Previously published in Accountancy Ireland

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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